Morton wants to maintain his lifestyle during retirement and give each of his two children $1-million after he sells his home.Tijana Martin/The Globe and Mail
Morton is 69 years old and on his own again. He retired from a career in engineering a few months ago.
He has shared custody of his two children, 15 and 17.
His income comes from two defined benefit pensions that pay him $68,280 a year indexed to inflation. He will start collecting deferred government benefits – Canada Pension Plan and Old Age Security – next year when he turns 70.
In addition to his two registered retirement savings plans, Morton has a $1.8-million condo in Vancouver with a $245,000 mortgage. He plans to pay off the mortgage in time, then sell the condo and give the money to his children.
Should recently widowed Curtis, 55, draw from RRSPs before tapping into taxable investments?
His questions: “Is passively relying on my two pensions, two RRSPs, CPP and OAS the best financial strategy for growth? Or do you recommend a better financial strategy to grow my portfolio?” Morton asked in an e-mail. “Can the above six sources sustain my current lifestyle?”
His retirement spending goal is to maintain his standard of living.
We asked Warren MacKenzie, an independent financial planner based in Toronto, to look at Morton’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
Morton is not super-rich, but with modest indexed pensions, he has enough to achieve his goals, Mr. MacKenzie said.
In addition to maintaining his lifestyle, Morton wants to give each of his children $1-million after he sells his home in 15 years or so and moves into a retirement home.
In preparing his forecast, the planner assumed the retirement home will cost $8,000 a month with today’s purchasing power. He assumed a 2-per-cent inflation rate and a 5-per-cent rate of return on investments.
Morton can do it all – maintain his desired lifestyle, give his children $2-million when he sells his home and move into a nice retirement home. If he lives to be 100, he’ll still leave an estate of more than $500,000 in today’s dollars, Mr. MacKenzie said.
“His problem is he doesn’t know that he has enough and therefore he worries unnecessarily.”
Morton pays $2,730 a month on his $245,000 mortgage.
Will Ellen, 62, need to downsize after retiring next spring?
The planner forecasts Morton’s cash outflow for 2026 will be $33,000 for mortgage payments, $50,000 for personal lifestyle spending and $20,000 for income tax, for a total of $103,000.
His cash inflow will be $10,788 from OAS, $21,348 from CPP, plus the $68,000 or so from his private pensions, for a total of about $100,000. The $3,000 shortfall will be covered by funds from his tax-free savings account.
“In 10 years the mortgage will be paid off, his pensions will have increased, and he will have surplus cash flow,” Mr. MacKenzie said. Each year, he will add the surplus to his TFSA.
Morton postponed his CPP and OAS benefits because he was working until last spring and did not want to draw benefits that would be taxed at the top marginal rate. By doing so, his CPP will be 42 per cent higher and his OAS will be 36 per cent higher.
“Morton is in good health and exercises regularly, so he expects to live well into his 80s,” the planner said. As long as he does, the delay in starting CPP and OAS is expected to increase the size of his estate.
“In his case, however, the benefit of delaying the start of OAS will be lessened because he will be in a higher-tax bracket and most of his OAS will be clawed back.”
Because Morton’s children are too young to be appointed executors of his estate, he should appoint a corporate executor, the planner said. “To minimize the possibility of a dispute between his children, he should have a family meeting and give them a copy of his will,” Mr. MacKenzie said.
In 15 years, when Morton plans to sell his condo, his children will be in their early 30s. “They may have little or no investment experience at that time,” the planner said. “If they receive a gift of $1-million each, there is a risk that they could make investment mistakes and lose a significant portion of their wealth.”
He may want to consider giving them inheritance advances with the suggestion that his children invest the funds. “By so doing, the children will make their mistakes with smaller amounts of money. So when they receive the bulk of their inheritance, they will be less likely to make costly mistakes.”
Should Ann-Marie, 60, sell her condo so she can spend $100,000 a year in retirement?
Morton is eventually going to pay income tax on the money he withdraws from his RRSPs. If he withdraws some funds within the next few years, he will pay income tax sooner.
“But if the money is given to the children sooner rather than later, and invested in their RRSPs, TFSAs or first home savings accounts (FHSAs), it will effectively be sheltered for a longer period of time – plus they will gain investment experience,” Mr. MacKenzie said. And withdrawing RRSP funds sooner will reduce the amount of the OAS clawback.
Morton could also reduce the amount he gives to his children later when he sells his home.
His financial investments, which consist of $425,000 in RRSPs and $72,000 in his TFSA, are 90 per cent invested in equity index funds and exchange-traded funds. “Given that equity markets are near their all-time highs, it would be unwise for most retired individuals to be so heavily invested in the stock market,” the planner said.
“However, when you consider the value of his real estate and his indexed pensions, his liquid assets amount to about 15 per cent of his total net worth,” Mr. MacKenzie said.
“It is hard to find investments safer than a government-indexed pension, so it is reasonable for him to invest his liquid assets quite aggressively. … Even if Morton lost all of his investments in a major stock market crash, he could still maintain his lifestyle based on his indexed pensions.”
Morton has more than enough to maintain his desired lifestyle and to provide his children with a significant inheritance, the planner said. “He simply needs to keep his financial plan updated and to reflect any changes in his goals or circumstances.”
Client situation
The person: Morton, 69, and his two children
The problem: Are his existing income sources enough to sustain his lifestyle? Can he afford to give each of his children a big inheritance when he sells his condo?
The plan: Consider tapping his RRSP a bit early and giving the children a small advance inheritance to invest. That way, they can gain experience investing.
The payoff: All of his financial goals achieved
Monthly after-tax income: $6,400
Assets: Bank accounts $25,000; TFSA $72,000; RRSPs $425,000; residence $1,800,000. Total: $2,322,000
Estimated present value of Morton’s two DB pension plans: $1.3-million. This is what someone with no pension would have to save to generate the same income.
Monthly outlays: Mortgage $2,730; condo fees $740; property tax $295; home insurance $70; electricity $110; heating $95; maintenance $40; car lease $482; other transportation $211; groceries $850; clothing $100; gifts, charity $45; vacation, travel $330; personal care $20; club membership $26; dining out, entertainment $145; subscriptions $25; health care $135; communications $145; TFSA $10. Total: $6,604.
Liabilities: Mortgage of $245,000 at 4.4 per cent.
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